A new tack on taxes

After an extremely loquacious first week in office, the new Treasury Minister Nicolás Dujovne has adopted a generally low profile but we can still obtain important clues as to where he is heading from the orthodox think tank FIEL, which he recently contracted to generate tax reform ideas to be implemented after this year’s midterm elections — FIEL has far less compunction about spelling out its ideas. It should be stressed that all tax reform proposals are required to fall within the government target of reducing last year’s fiscal deficit by around 15 percent — this limits the scope for importing Reaganomics (or Trumponomics) into Argentina in the form of drastic tax cuts, especially after the elimination of most export duties (any fundamentalism about balanced budgets would also be unacceptable to a government which sees gradualism as unavoidable for political survival). For this reason FIEL is cautious about any changes ahead of more sustainable public spending levels or permanently taming inflation.

Among FIEL’s proposals, at least two seem to warrant serious reconsideration — lowering IVA value-added tax and slashing employer contributions. Argentina has far too much indirect taxation and far too little direct, which is more socially progressive — to this extent the FIEL proposal to trim IVA from 21 to 19 percent is positive. Yet to make this change fiscally neutral in the context of the deficit problem FIEL advocate eliminating all categories halving IVA to 10.5 percent, or zero, and many of these (milk, bread, unprocessed meat, fresh fruit and vegetables, transport, domestic fuel, etc. — perhaps less so prepaid health schemes, printed press publications, some consumer electronics and works of art) are absolutely crucial for alleviating the poverty of the lower classes. Moreover some provinces (e.g. Córdoba) have already proposed replacing taxation on gross earnings (which the economic team is keen to cut) with a provincial IVA — apart from moving in the wrong direction by replacing direct with indirect taxation, there is thus no guarantee of any overall IVA reduction. As for reducing employer contributions among other labour charges (and here Dujovne is much more vocal), the experiences of both Peronist and non-Peronist presidencies (Carlos Menem and Fernando de la Rúa) have shown the impact to be largely negative while doing nothing to make Argentine industry competitive with Asian wage levels.

Yet beyond the specific proposals there are no easy answers with the current deficit — either the government drastically cuts public spending (over two-thirds of which goes on health, education, welfare and pensions when a third of the population is below the poverty line) or it takes a much harder look at income taxation, defying the political noise for higher ceilings.